Having a good credit score is vital when it comes to being accepted for mortgage, credit card or even mobile phone contract – and getting the best rate.
But until now, improving your credit score has required you to take on debt and then demonstrate you can repay it responsibly, which for most means taking out a credit card and paying it off each month.
However TSB and start-up, Loqbox, are now claiming to offer a tool to improve your credit history by saving instead of spending.
We take a look at how it works and whether it really could be the answer to improving both your score and your savings habits.
Win win: Loqbox allows customers to build up a savings pot while building up their credit score
How does it work?
In practice it feels much like a regular savings account, diverting a little money each month into a pot, but this is technically an interest-free finance credit contract, spreading the cost of a loan across 12 monthly repayments.
First you choose to ‘save’ between £20 and £500 each month. Remember this must be affordable as you will need to make the same payment each month for a year.
Loqbox then acts as a credit broker, organising a deal with its sister finance company, DDC Financial Solutions.
How much should you borrow to improve your score?
Loqbox says companies like to see that you have already managed monthly repayments at a similar level to the ones you are applying for.
Here are examples it gives:
- £20 per month – basic mobile phone contract
- £50 per month – £1,000 credit card balance with an APR of 18.9 per cent in two years
- £100 per month – a £3,250 loan over three years with a 7 per cent APR
- £200 per month – finance on a second-hand Audi A1
- £500 per month – monthly payment on a £100,000 mortgage with an interest rate of 3.5 per cent over 25 years
It then lends you the money to buy a digital savings voucher worth the total value of your 12 deposits over the year.
For example, someone saving £100 per month would buy a Loqbox digital savings voucher worth £1,200.
After a year, or before if you need to, you swap this digital savings voucher for the cash.
No interest is paid on your pot, so you just get the amount you have paid into the account back at the end of the 12 months.
But the advantage is that each monthly payment is reported to the credit reference agencies, showing companies a pattern of regular repayments on debt.
Loqbox won’t run a search of your credit score beforehand, so no one should be excluded from opening an account.
You will need a bank account which allows direct debit payments to set up an account.
Direct debits are started automatically when you set up your contract deal.
BUT forget to pay and you will make things even worse
There is one major drawback though, you could end up making your situation worse if you don’t manage it correctly.
If you miss a payment it will also be reported to credit referencing sites and create a mark on your file that future lenders will see as a missed payment.
That said, if you can’t afford to pay, you can end your contract early without penalty at any time and get back all of your money.
So what if you cannot pay or need the cash before the year is up?
If you do want access to the cash early you can close your agreement at any point. This effectively means the company pays you back the value of the Loqbox minus the value of repayments you have yet to make, so repaying all the money you have paid already.
If you can’t pay on time, you can send an email explaining to customer support and they may be able to give you more time.
Rejected: The most competitive financial products require near-perfect credit scores
What does it cost?
There is no fee, Loqbox will aim to make money by getting you to open a free account or take an Isa with one of its partners to pay your savings into.
If you want to pay money back to your own account at the end but you don’t want to open one of its partner accounts you will have to pay a fee for a ‘premium add-on’ feature called Flexi Unlock, costing £30.
If you try but you can’t open one of the affiliate accounts it will let you move your cash back to your existing account for free.
Is your money safe?
All the money you deposit is ring-fenced in an account with Lloyds Bank.
This is fully protected by the Financial Services Compensation Scheme up to the normal £85,000 limit for each saver according to Loqbox.
How does it compare to rival services?
There is a similar service This is Money wrote about in 2016, Credit Improver, from the same company which built the Loqbox tool, Nooli.
This works in a similar way, offering a monthly financing contract for costing £9.99 per month.
Technically the repayments are set up to pay for an advice book, and at the end you don’t get your money back. But it says 96 per cent of customers improve their rating and if you don’t, you get your money back.
Again you can cancel your plan at any time. Another difference, it offers contracts for up to 36 months if you want.
The other option is a credit-builder credit card. These tend to come with much higher APR rates and none of the perks you find for a standard credit card – such as 0 per cent interest deals or cashback for spending.
But they have lower entry requirements and will let you open one even if you have a history of bad debt.
This is Money verdict
Traditionally the only real option for someone wanting to build up a history of responsible borrowing is to open a specialist credit-builder card.
These can be a useful tool if used wisely but with sky-high APR rates, small slip ups can not only cost your credit score but they can build up debt further.
Setting up a savings pot is always going to be a more sensible option. But it may not be achievable for the section of people with a poor credit rating because they have struggles with debt already.
It’s likely to suit those who have a low score because they do not have cause to borrow, or have not had a chance to build up a good credit score yet because perhaps they are too young.
There is one major pitfall of the Loqbox scheme – if you don’t pay up then you will receive black marks on your file. This is a big downside, as these remain on your file for seven years.
That said, to avoid this all you need to do is not touch the direct debit set up at the start to make the repayments. If you don’t have money to make the repayment you can just cancel.
It’s a bit sneaky that you have to open an account with one of their affiliates to get your cash at the end of the 12 months, and it’s not something that is particularly clear on the website unless you look into the FAQ section.
That said, if you really can’t open one of these you are not forced to, and the penalty of £30 isn’t exorbitant considering that other companies offer similar credit-building tools at a cost of £10 per month.
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